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Economy

India's GDP growth dips to 3-year low in April-June quarter

Note ban, tax overhaul blamed for weakest expansion of Modi's tenure

Retailers rushed to cut inventories ahead of the July introduction of the goods and services tax.

NEW DELHI -- India's gross domestic product growth slumped to 5.7% in the April-June period, the lowest in 13 quarters mainly due to the lingering impact of last November's shock demonetization and as manufacturers trimmed back inventories ahead of the July 1 rollout of the country's new goods and services tax.

In the year-earlier quarter, the growth rate was 7.9%, while it was 6.1% in January-March. A Reuters poll of economists had predicted April-June GDP would grow 6.6%, as had Japanese brokerage Nomura.

The slowdown in the first quarter of the financial year that began in April was led by manufacturing, which was hit by concern over how smoothly the GST would be implemented. The sector grew just 1.2%, compared with 10.7% in the same quarter last year, according to the government data released on Thursday.

The July 1 launch of the GST brought the replacement of over a dozen levies with one unified tax. Almost all goods and services are now subject to one of four tax rates: 5%, 12%, 18% or 28%.

India's chief statistician, T.C.A. Anant, said businesses pared down inventories in the run-up to the GST's rollout, adding that the situation would return to normal as they adopt the new taxation regime.

The agriculture, forestry and fishing sector expanded 2.3%, against 2.5% in the corresponding period last year. Growth in the financial, insurance, real estate and professional services sectors slowed to 6.4% from 9.4% a year earlier. However, trade, hotel, transport, communications and services related to broadcasting showed an 11.1% uptick, compared with 8.9% the year before.

Slowest under Modi

The 5.7% growth is the slowest since Prime Minister Narendra Modi came to power in May 2014. The previous low was 5.3%, reported in January-March 2014.

The latest numbers show that India lags behind neighboring China, which reported a growth rate of 6.9% in the June quarter, with economists saying it would be hard for Asia's third-largest economy to reach 7% growth for the full fiscal year. The Indian economy grew 7.1% in the financial year ended in March.

"It's a disappointment," Pronab Sen, former chairman of the National Statistical Commission, told the local CNBC affiliate. "The manufacturing number is a bit of a shocker," indicating that there is "serious demand compression," he said.

The lower-than-expected agriculture number also shows the effects of demonetization despite favorable weather conditions, Sen said, adding that full-year GDP expansion could now fall short of 6.3%.

Demonetization

Last Nov. 8, Modi banned 500 rupee and 1,000 rupee notes in a sudden move to curb "black money," or untaxed wealth, corruption and counterfeit currency. The drastic step withdrew some 15.4 trillion rupees from the cash-heavy economy, disrupting business activity.

Capital Economics, a macroeconomic research agency that had predicted 6.5% growth, said the slowdown in the June quarter was "a surprise."

"When the economy slowed in [January-March] this was widely attributed to the impact of the demonetization that was announced late last year," it said, adding that it and most others had thought the headwind would have eased.

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